With all the hoopla surrounding program cost growth and schedule slips, and the resulting calls for “acquisition reform”—and even some statutory steps in that direction—one might think there have been put forward some innovative suggestions.  Nope.  As we posted recently, most of the “conventional wisdom” in this area is wrong, and most “reformers” are more aptly described as PWACs—Persons Without A Clue.

So it is with a great deal of satisfaction that we can finally point to one recommended acquisition reform step that, if implemented, would save the taxpayers a great deal of money—as well as increasing efficiency within program supply chains.  What makes this step even more interesting is that it comes from an unlikely source:  the Defense Department Inspector General (DOD IG).  Talk about adding value!

Here’s the DOD IG report that caught our eye and sparked our fascination.  It’s a report from October 2009, just released (in redacted form) in mid-February 2010.  It discusses the volatility of titanium pricing, and suggests some ways in which the DOD could better control the pricing it receives for this commodity.  Why in the world would it take auditors to recommend such a fundamental—nay, basic—strategic acquisition approach?  But before we get too wrapped up the obviousness of the recommendation, let’s look at what the DOD IG had to say.

First, the IG noted that certain contracts (notably the multi-year contract for the Navy F/A-18 E/F Super Hornet) contained economic price adjustment contract clauses.  These clauses are designed to provide automatic contract price adjustments based “on changes in the economic behavior of the national economy.”  Without these contracts, contractors would have to price in the risk that certain commodities would suffer price increases; should those increases not materialize then the contractors would receive a windfall.  Essentially, the clauses turn otherwise fixed-price contracts into limited forms of cost-reimbursement contract—but only for the commodity covered and only to the extent that the market price for that commodity moves outside certain bounds, as reported by the Bureau of Labor Statistics (BLS) in its producer price index (PPI) reports.

In this case, the commodity in question is titanium.  Titanium is a strong, lightweight metal with an exceptional strength-to-weight ratio, elevated temperature performance, and corrosion resistance.  It is used in a variety of applications, most notably in jet engines and airframe components.  The IG reported that, in 2007, “an estimated 76 percent of domestic titanium metal was used in aerospace applications.”  There are three major domestic titanium suppliers:  TIMET, ATI, and RTI.

The IG found that “the BLS producer price index for titanium mill shapes, used in the economic price adjustment clause of the Navy F/A-18 E/F Super Hornet contract, was outdated and subject to extreme market volatility, as it was primarily based on spot market prices. The index was also too narrow to be used in DOD multiyear contracts…”  But the DOD IG had more to say on the subject of titanium pricing.

It reported that “DOD had not effectively mitigated its risk for titanium material price increases… As a result, Defense aerospace weapons systems were subject to higher market prices for titanium material based on supply and demand of titanium in the commercial marketplace.”  It provided three root causes for this situation:

1.      DOD suppliers of titanium components had not always secured titanium material on long-term contracts and material purchased at market prices carried a significantly higher price that got passed through to DOD contracts.

2.      DOD multiyear contracts that used the BLS producer price index for titanium mill shapes were not effective because the BLS index was outdated, primarily based on spot market prices, and too narrow an index.

3.      DOD does not have a strategic purchasing program for titanium to leverage buying power, take advantage of economies of scale, and secure prices on longterm contracts when acquiring titanium products.

The DOD IG noted that the DOD requires between 20 and 30 million pounds of titanium annually.  Importantly, the Pentagon could save “from $100 million to $300 million annually” if it purchased half of its needs via a long-term contract instead of having its contractors purchase it at market prices.  As evidence for that assertion, the IG reported on how the titanium price volatility had affected the F/A-18 contract prices, noting that “The material price increase related to titanium costs for the FY 2007 through FY 2009 performance period was $129 million, which accounted for more than 66 percent of the total material cost increases during that period of performance.”

The IG concluded: 

DOD was subject to market volatility in titanium material pricing because DOD did not have a strategic purchasing program for titanium to leverage buying power, take advantage of economies of scale, and secure prices on long-term contracts when acquiring titanium products. Also, DOD had limited options when purchasing titanium because of the restriction on the acquisition of specialty metals under title 10, United States Code, section 2533b.

The IG recommended that the DOD adopt a strategic materials management process with respect to titanium, and noted that DOD had requested this step in an April 2008 report to Congress.  The IG reported:

The Strategic Materials Protection Board concluded that the National Defense Stockpile should reshape into the Strategic Materials Security Program. They stated that this program could have the programmatic flexibility to efficiently and effectively acquire the right materials and to ensure that essential strategic materials are available to respond to current and future needs and threats, including the ability to more fully project material needs and the ability to leverage the buying power of DOD and other Federal agencies by aggregating materials requirements and negotiating long-term strategic procurement arrangements. In line with the conclusions of the National Defense Stockpile April 2009 Report to Congress, the Deputy Under Secretary of Defense for Industrial Policy, in conjunction with the Administrator, Defense National Stockpile Center, Defense Logistics Agency, should develop a strategic purchasing program for titanium with U.S. titanium producers to leverage buying power, take advantage of economies of scale, and secure prices on long-term contracts when acquiring titanium products.

This is real acquisition reform, folks.  This is a relatively simple two-step process that could save the DOD from $100 to $300 million each year.  That money could go to other needs, or back to the taxpayers.  So what is Congress waiting for?

12 February 2010 – The U.S. Department of Justice (DoJ) announces that “Lincoln Fabrics Ltd., a Canadian weaver of ballistic fabrics, and its American subsidiary, have agreed to pay the United States $4 million to settle the United States’ lawsuit against Lincoln for violations of the False Claims Act in connection with their role in the weaving of Zylon fabric used in the manufacture and sale of defective Zylon bullet-proof vests.”  According to the DoJ press release—

The United States alleged that the Zylon in these vests lost its ballistic capability quickly, especially when exposed to heat and humidity. The United States further alleged that Lincoln was aware of the defective nature of the Zylon by at least December 2001, but continued to sell Zylon for use in ballistic armor until August 2005, when the National Institute of Justice issued a report that Zylon degraded quickly in ballistic applications. At that time, all American body armor manufacturers stopped using Zylon in body armor. … This settlement is part of a larger investigation of the body armor industry’s use of Zylon in body armor. As part of today’s agreement, Lincoln has pledged its cooperation in the Government’s on-going investigation. The United States previously has settled with six other participants in the Zylon body armor industry for over $54 million. Additionally, the United States has pending lawsuits against Toyobo Co., Honeywell Inc., Second Chance Body Armor, Inc. and First Choice Armor Inc.

16 February 2010 – The DoJ announces that “An Italian subsidiary of a U.S.-based company has agreed to plead guilty and to pay a $2.29 million criminal fine for participating in a conspiracy to rig bids, fix prices and allocate market shares of marine hose sold in the United States and elsewhere.”  The DoJ press release explained—

A one-count felony charge was filed today in U.S. District Court in Houston, against Parker ITR S.r.l., a manufacturer of marine hose, headquartered in Veniano, Italy. … Parker ITR has agreed to pay a criminal fine and to cooperate fully in the Department’s ongoing antitrust investigation. Parker ITR is the fourth company to be charged in the investigation. To date, nine individuals have been convicted for their involvement in the marine hose conspiracy.  … Parker ITR is charged with participating in the conspiracy from as early as 1999 until as late as May 2, 2007. According to the charge, Parker ITR and its co-conspirators agreed to allocate shares of the marine hose market and to use a price list for marine hose in order to implement the conspiracy. Parker ITR and its co-conspirators agreed not to compete for one another’s customers either by not submitting prices or bids, or by submitting intentionally high prices or bids, to certain customers. As part of the conspiracy, Parker ITR and its co-conspirators provided information received from customers in the United States and elsewhere about upcoming marine hose jobs to a co-conspirator who served as the coordinator of the conspiracy. Parker ITR received marine hose prices for customers in the United States and elsewhere from the coordinator of the conspiracy and then sold the marine hose to those customers at collusive and noncompetitive prices and then concealed the conspiracy through various means, including code names, private email accounts and telephone numbers.

Parker ITR is charged with violating the Sherman Act, which carries a maximum fine of $100 million for corporations. The maximum fine may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

18 February 2010 – The DoJ announces that “former military contractor Terry Hall, 43, of Snellville, Ga., pleaded guilty today to conspiracy to pay more than $3 million in bribes to U.S. Army contracting officials stationed at Camp Arifjan, an Army base in Kuwait, and to money laundering conspiracy.”  The DoJ press release continues--

Terry Hall was indicted on May 6, 2009, along with U.S. Army Major Eddie Pressley, 39, and his wife, Eurica Pressley, 37, both of Harvest, Ala. … Hall’s companies received approximately $21 million between 2005 and 2007. … To obtain the contracting business and facilitate unlawful payments by other contractors, Hall admitted he made more than $3 million in unlawful payments and provided other valuable items and services to U.S. Army contracting officials stationed at Camp Arifjan, including U.S. Army Major Eddie Pressley, and former Majors John Cockerham, James Momon and Christopher Murray, among others.

… Hall owned and operated several companies, including Freedom Consulting and Catering Co., (FCC) and Total Government Allegiance (TGA), which provided goods and services to the U.S. Department of Defense (DoD) in connection with Operation Iraqi Freedom. Hall’s companies received a Blanket Purchase Agreement (BPA) to deliver bottled water in Iraq and a contract to construct a security fence in Kuwait.

The case against Hall arose out of a wide-ranging investigation of corruption at the Camp Arifjan contracting office. To date, eight individuals including Hall have pleaded guilty for their roles in the bribery scheme. On Dec. 2, 2009, former Cockerham was sentenced to 210 months in prison and ordered to pay $9.6 million in restitution. According to court documents, Cockerham arranged for Hall’s companies to receive bottled water calls worth more than $2.6 million, as a result of which Hall paid Cockerham approximately $800,000.

… Momon arranged for Hall’s companies to receive bottled water calls [against a Blanket Purchase Agreement] worth approximately $6.4 million, as a result of which Hall paid Momon more than $300,000. Momon pleaded guilty on Aug. 13, 2008, to receiving bribes from various contractors at Camp Arifjan, including Hall, and is awaiting sentencing. … Murray arranged for Hall to receive contracts to construct security fences at Camp Arifjan, as a result of which Hall paid Murray approximately $30,000. Murray pleaded guilty to receiving bribes from various contractors at Camp Arifjan, including Hall, and making a false statement. He was sentenced on Jan. 8, 2009, to 57 months in prison and ordered to pay $245,000 in restitution.

The case against Eddie Pressley and his wife, Eurica Pressley, is scheduled for trial on April 5, 2010. The indictment alleges that the Pressleys received more than $2.8 million in money and other valuable items from Hall, in exchange for Eddie Pressley’s agreement to take official actions to benefit Hall. Eurica Pressley, at her husband’s request, allegedly arranged for an entity named EGP Business Solutions Inc., (EGP) to be incorporated, opened a bank account in the name of EGP, and opened bank accounts in her name in the United States, Dubai, United Arab Emirates and the Cayman Islands, all in order to receive the bribe payments.

The charge of bribery conspiracy carries a maximum prison sentence of five years and a $250,000 fine. The money laundering conspiracy carries a maximum prison sentence of 20 years and a $250,000 fine. According to the court documents, Hallwill forfeit $15,757,000 to the U.S. government.

19 February 2010 – The DoJ announces that “A U.S. Army contracting official was charged today with bribery and unlawful salary supplementation in connection with two schemes to solicit more than $30,000 in bribes from an Egyptian businessman in Kuwait.”   The DoJ press release provided the following details—

William Rondell Collins, 46, of Bartlett, Tenn., was charged today in a four-count indictment … with two counts of soliciting and accepting bribes as a public official and two counts of unlawful salary supplementation from a source other than the U.S. government.According to the indictment, the U.S. Army Area Support Group-Kuwait (ASG-KU) is responsible for maintaining Camp Arifjan, a U.S. military installation providing support for operations in Afghanistan, Iraq and other locations in the Southwest Asian Theater. As part of those responsibilities, the ASG-KU maintains an off-post housing office in downtown Kuwait City, which procures, leases and supervises off-post housing for government employees and military service members stationed at Camp Arifjan. According to the indictment, Collins was employed in the ASG-KU’s off-post housing office as a housing specialist responsible for supervising private contractors and procuring off-post apartment rentals.

The indictment alleges that, in January 2009, a company owned by an Egyptian businessman was awarded a fixed-price U.S. government contract to provide maintenance services for off-post housing managed by Collins and the ASG-KU off-post housing office. … in July 2009, Collins allegedly solicited a monthly fee of approximately $1,400 from the Egyptian businessman in return for Collins’s agreement to provide favorable and preferential treatment and advice to the Egyptian businessman’s company on the performance and renewal of the contract. Collins also allegedly agreed to conceal from his supervisors the existence and nature of the monthly fee arrangement. According to the indictment, Collins allegedly accepted five $1,400 payments from the Egyptian businessman between July and December 2009.

The indictment also alleges that, between July and December 2009, Collins solicited a monthly payment of approximately $962 from the Egyptian businessman in exchange for drafting and submitting an inflated off-post apartment lease to the United States for approval. According to the indictment, Collins allegedly received approximately $5,775 from the Egyptian businessman on Dec. 13, 2009, representing a six-month advance on the scheme.

The bribery counts each carry a maximum penalty of 15 years in prison and a fine of the greater of $250,000 or twice the value gained or lost. The unlawful salary supplementation counts each carry a maximum penalty of five years in prison.

Look, we don’t want to go on a rant here.  But seriously, this is getting out of control.  Not a week goes by without a story of corruption, bribery, and/or fraud hitting the internet.  We’re glad these wrongdoers are getting caught, but why do so many participants in the public procurement process think they can get away with such blatant wrongdoing?  Clearly, they expect to get away with it.  Our question is, why?  Are internal controls so loose in the Southwest Asia theater of operations?  Is management oversight lax?  Are the wrongdoers simply stupid? We don’t think so—some of these malefactors are senior military officers.  What in the world is going on?